The Serbian won 6-4, 4-6, 6-2 to record his third win over Federer in five meetings this year.
The Swiss, who was once a ball boy at the tournament, was returning after a six-week mini-break following his US Open final defeat to Juan Martin del Potro.
Federer, who had not previously dropped a set or lost a service game in the tournament, had his serve broken four times as he lost a final for the third time this year following defeats at the Australian and US Open.
The match featured an extraordinary 10th game in the first set where Federer saved six set points and Djokovic five break points before the Serbian wrapped up the set at the seventh attempt.
"Today, I played by far my best match of this tournament. It came at the right time," said the 22-year-old in an interview on court.
Both players rattled off their first four service games easily before Federer was broken in the ninth.
MISPLACED PASS
The 10th game took 24 minutes as both players made mistakes at crucial moments.
Federer sent a flurry of shots into the net while Djokovic repeatedly overhit his drives when presented with the chance to wrap up the set.
Federer eventually obliged for him with a misplaced pass as he faced set point for the seventh time.
The Swiss started the second set by having his serve broken again before enjoying his best spell of the match.
He broke back in the fourth game with an exquisite drop shot from the baseline, which brought the house down, and again in the 10th to wrap up the second set, helped by a double fault from Djokovic.
Federer lost serve twice in a row at the start of the third set and frittered away his last chance when he squandered three break points in succession in the sixth game.
Djokovic finished off the match at the first attempt when Federer sent an attempted drive high into the air.
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